Countless people deal with large amounts of debt, every day. In fact, the majority of people carry some kind of debt, be it a student loan, car loan, a house mortgage, credit cards, personal loans – and sometimes even payday loans! Reducing, correctly managing, and paying off credit card debt is a very important and crucial skill for your financial well-being. In this article, we're going to list some of your options for handling this issue and show you how to get rid of credit card debt. Credit cards and personal loans are our specialty – so if you’re genuinely struggling, get in touch with our friendly team of Credit Counsellors who can help you devise a plan to pay off credit card debt, take control and get your finances back on track.
5 Practical Ways to Reduce Credit Card Debt
1. Reduce Debt: Pay of Your Credit Card with Debt Consolidation
One common method of restructuring credit card debt is via debt consolidation. It means combining the debt of a few different cards in order to reduce the costs, such as the annual interest rates. Consolidating your debt also makes it easier to manage the payments because you will be making one payment to one place instead of multiple payments to multiple accounts, each week or each month. Another benefit of consolidating debt is that it allows you to spread the payments over time, which can make the payment process easier. Let's take this example into account: one of your credit cards has a 15% interest rate. You decide to consolidate it with 3 other cards and a student loan. That lowers your interest rate to 11%, and now you can make the payments in 3-month instalments instead of monthly instalments. You will end up paying much less interest overall, compared to your original payment plan. Before you start looking for the best company to consolidate credit card debt – double check your credit rating! If you’re ineligible to reconsolidate, it may mean you need personal insolvency advice.
2. Decrease Debt: Home Equity Release to Pay Off Credit Card Debt
Another possible solution to help reduce credit card debt is to take out a home equity loan. If you're a homeowner and depending on your credit status, you could take out a loan using your home as equity and then use those funds to pay off your credit card debt. Home equity loans usually have fixed interest rates, but credit card companies' interest rate is variable and depends on a number of different factors. So, in theory, if you can get a lower interest rate on your home loan compared to the credit card debt interest rate, and use the difference to pay less on your credit card debt. Of course this can be a risky financial move, since you're putting up your home (an asset) as collateral, and you could end up losing your home if you default on the loan. Credit card debt settlement really depends on how much you are willing to risk your other assets and complicate things further.
3. Slash Debt: Negotiate a Lower Credit Card Interest Rate
Calling your bank and asking the bank to lower the interest rate might seem like a silly idea, but it sometimes works. Depending on your credit score and whether or not you've made your payments on time, it might be possible to reduce a few percent from your interest rate, which in the long run will potentially save you hundreds of thousands of dollars. As with any negotiation, it helps to do your research, shop around for quotes online, and come to the negotiations prepared with a list of other lenders who are willing to provide you with a better deal. Your lender is far more likely to negotiate on the amount if they face the prospect of losing your business!
4. Reduce Debt: Credit Card Refinancing
Whilst there isn’t such a thing as a free interest credit card, some banks do offer the option to transfer your debt to a balance transfer credit card. These are special accounts that do not charge any interest for a short time. Using this option will give you breathing room to escape high-interest rates for a short period of time. You can use this time to pay off as much as possible from the debt. Keep in mind that the transfer of debt to this new credit line usually has a few percentages of processing fee that you need to pay upfront. Do the math accurately to make sure the transfer is actually beneficial and take this opportunity to decide upon a proper strategy to get a better interest rate, so you can prevent the interest from getting out of hand (again) and reduce the debt as fast as possible. And be sure to do your research before you transfer credit card balance, as there are heaps of credit card balance transfer offers out there, and you may be able to get a way better deal than if you simply take the first option that comes your way! At the end of the day, getting a balance transfer won’t erase credit card debt – but it can give you a chance to catch up!
5. Control Interest: Pay More than the Credit Card Minimum Payment
Credit card companies generally have an interest rate that compounds DAILY. That's why in order to maximize their profit, they usually require you only to pay 3 to 4 percent of your debt each month. Voluntarily increasing the monthly credit card minimum payment helps you quickly pay off debt and avoid the daily interest rate. In this manner, you will end up paying less by the end of it, rather than just continuing with the minimum monthly payment. Not only this - paying more off your credit card will reduce your credit utilization ratio which may actually improve your credit score!
Here’s how you can step up your game to get rid of credit card debt – faster!
- Keep up your credit card repayments - avoid interest rates and late payment fees by staying on top of your monthly repayments,
- Lower your credit card limit - If you have found yourself struggling to make credit repayments in the past, set your credit card limit to an amount you can repay within 3 months, and
- Close each credit card account as you pay it off - if you have multiple cards, make sure you close the account as you clear the debt on each card to avoid any fees – not to mention the temptation to spend the money!
Credit card debt can be extremely troublesome and worrying when it starts piling up! Because of the financial stress and anxiety it can add to people’s lives, we're always looking to reduce credit card debt as the first step in any plan to becoming debt free. We hope this article has helped you learn how to get out of paying credit card debt, or at least give you some ideas about how to approach it. Our knowledgeable team of debt advisors are ready to help you with your credit card debt reduction. Call us on 1300 003 328 to get started on your debt free journey, today!